How strong is the housing recovery, and what could reverse it?

What would make a strong foundation for a recovery? First, a housing recovery should be built on solid job growth — something that isn’t happening. Job growth of high-paying jobs would translate to more mortgage originations and purchases by owner occupants. Since job growth stimulating owner-occupant purchases should be the foundation of a recovery — and since that isn’t happening — the recovery is being built on a shaky foundation. The recent price rally — call it a housing recovery if you wish — is built on two things: 1) lender restricted inventory, and 2) low interest rates. If either of those two factors change, the housing recovery could easily be snuffed out. After all, the real demand behind a recovery simply isn’t there yet.

“While we have seen many dramatic headlines touting the housing recovery over the last 3.5 years, these headlines and the analysts who author them have been over- predicting changes in the housing market (versus what actually occurred).” said Laurie Goodman of Amherst Securities in a new report.

Most financial reporters are overly optimistic. They seem to believe they have some responsibility for boosting consumer confidence by telling the world everything is going to be alright — even when it’s not. The denial of the housing bubble back in 2006 and 2007 is a classic example. I stood out back then because I was willing to tell the truth about our impending disaster, and nobody in the financial press (and certainly no loan owners) were willing to accept it.

“Recoveries, with attendant price increases, were anticipated in the spring and summer of 2009, 2010 and 2011; by the fall and winter the predictions of price changes were amended to reflect further price declines. In actuality, after netting out the seasonal factors, home prices have been little changed in the past few years.”

Does that mean that we’re headed for yet another housing scare come Halloween time? Is housing’s winter chill just around the corner? Not according to the bulk of Americans surveyed in yet another new report:

“Consumers are showing increasing faith in the nascent housing recovery,” said Doug Duncan, senior vice president and chief economist of Fannie Mae. “Home price change expectations have remained positive for 11 straight months, and the share expecting home price declines has stabilized at a survey low of only 11 percent.”

Keep in mind that consumers are stupid. Most consumer surveys make better contrarian indicators because the general public is wrong most of the time.

The expectation is now that home prices will increase an average of 1.5 percent in the next year, according to the survey, and that has sellers coming back to the market. Of those surveyed, 19 percent said now is a good time to sell. That’s the highest since the survey began in June 2010. But wait, 19 percent? That’s still not a lot.

These national surveys seek overall trends and tout big headlines, but real estate is and always will be local, and this recovery is becoming increasingly local. That is clear in the latest numbers on supplies of distressed homes.

Locally, house prices are going to go up. There is far too little inventory to push prices lower, and affordability is the best it has been since the 1970s.

The so-called “shadow inventory” of homes that either have seriously delinquent mortgages, are in the foreclosure process or are bank-owned but not yet listed for sale, fell to 2.3 million units in July according to CoreLogic. That’s a 10 percent year-over-year drop, and puts the supply at about six months by the current sales pace.

“The decline in shadow inventory has recently moderated reflecting the lower outflow of distressed sales over the past year,” said Mark Fleming, chief economist for CoreLogic. “While a lower outflow of distressed sales helps alleviate downward home price pressure, long foreclosure timelines in some parts of the country causes these pools of shadow inventory to remain in limbo for an extended period of time.”

So what happens when a market like Orange County clears out while 100,000 properties languish in Riverside County? Eventually, the substitution effect will kick in, and people will opt to buy the less expensive house in Riverside County, and in doing so, the demand will weaken in the Orange County market. This won’t cause prices to drop, but it will weaken sales and limit appreciation.

And that’s the problem. In states where a judge is required in the foreclosure process, like New York, Florida and New Jersey, foreclosure timelines are still marked in years, not months. That will keep home prices from recovering as quickly there. Prices could in fact deteriorate. (Read More: Housing Alert: Short Sales may Be in Big Trouble.)

“Market participants have become too accustomed to speaking about a national housing market and national home price appreciation. Going forward, we expect price behavior to vary by price range and location. To over-generalize — we anticipate that the judicial states, those in which a court order is necessary to proceeds with the foreclosure process, will take much longer to clear the distressed inventory than the non-judicial states, and higher-priced homes will take longer to clear than lower priced,” noted Goodman.

That is my opinion as well. The judicial foreclosure states have most of the shadow inventory right now, so they will take forever to clear. Price declines are coming there — price declines they should have endured in 2008 but didn’t because the inventory was not processed. I have written at length about the high-end shadow inventory and the lack of a move-up market, and that market segment will continue to under perform.

Much of the latest optimism in housing is due to record low mortgage rates. The Federal Reserve’s latest action to buy $40 billion in agency mortgage-backed securities sent rates plunging and mortgage applications rising.

The applications, however, were largely for refinances, not home purchases. The Fed’s move gave more Americans confidence that mortgage rates will not increase in the next year, according to Fannie Mae’s survey, but those consumers may be wrong. (Read More: Will Fed’s Mortgage Buying Juice the Housing Recovery?)

“More recently, MBS yields have made up nearly all of their initial drop. If sustained, that suggests that mortgage rates may not fall much further, and could even rise,” notes Paul Diggle of Capital Economics.

If the federal reserve cannot keep mortgage interest rates low with its guaranteed $40B monthly purchase program, then I will re-evaluate my opinion on future house prices. My belief today is that mortgage interest rates will stay low for the next two or three years at least. If that assessment is wrong, affordability could plummet, and house prices will plummet along with affordability. The reason prices are rising right now isn’t just because inventories are tight. Buyers have the capacity to raise their bids. Once interest rates go up, buyers won’t have this ability, and the rally will stop dead in its tracks.

Home buying and selling cannot always be qualified and quantified by monthly economic numbers. It is a highly emotional business, which is why sentiment can not only ignore reality, it can effect reality. Going forward, much of the housing recovery will be driven by sentiment. It remains to be seen if that sentiment will hold if this warming recovery hits a new chill.

Sentiment will not hold back the market here. Kool aid intoxication returned the nanosecond house prices showed strength. Far too many people were rewarded with far too much HELOC money during the bubble, and despite the six years in HELOC purgatory, people still remember what happened, and many are buying today in hopes that HELOC money will return.

Ordinarily I would say such a fake recovery cannot be sustained, but when Bernanke pledged to provide as much fake money as necessary for as long as necessary, it becomes much more difficult to make the case that the recovery will not be sustained. As long as Bernanke does not go back on his word, prices will not go down.

Individuals who overuse antibiotics for every pain and sniffle will [over time] render those remedies ineffective. Along comes a super-bug, patient takes usual antibiotic dose, nothing happens, and he is dead.

Sadly, our whole economic system may be galloping along the same path. Is such self-destruction hard wired into the human condition or are we [as a society] just plain stupid?

I think the federal reserve believes they can solve any problem — even the problems created by the solutions they implemented to the previous problems. I think it’s a pathology in their thinking, but only time will tell if they create a financial super-bug that they can’t wipe out.

The problem is counter-education. Studying at Harvard under statist professors (be it socialist, communist, marxist, or mixture thereof in varying degrees) does not render one uneducated, merely counter-educated. And free market capitalism becomes the victim of the counter-educated smear campaign.

Rinse, wash, repeat over several generations and here we are…

Just as the Fed is adept at printing and destroying purchasing power, so are the communists at gutting a productive society.

NEW YORK (CNNMoney) — Falling mortgage rates fueled by the Fed are having only a limited impact on the economy, said Federal Reserve Bank of New York President William Dudley Monday.

While the Fed’s stimulus policy is working, even more aggressive policy could have been more effective, Dudley said.

Last month, the central bank launched a third round of bond-buying stimulus known as quantitative easing, or QE3. The program entails buying $40 billion in mortgage-backed securities each month, in an effort to lower mortgage rates and stimulate the housing market.

Since then, mortgage rates have fallen to record lows.

Home prices, sales and new construction had already been showing signs of improving before the Fed acted, and are largely expected to continue recovering.

But Dudley said the impact of Fed policy on the housing market could have been even greater if it weren’t for tight lending standards and higher fees from Fannie Mae and Freddie Mac, which have discouraged banks from originating loans.

“One reason that monetary policy may have been less powerful than normal is that one of the primary channels through which monetary policy influences the real economy — housing finance — has been partially impaired,” Dudley said at the National Association for Business Economics Annual Meeting in New York.

Monetary policy also becomes less powerful over time, he said, so a larger stimulus from the start would have been more effective than spreading it out.

“With the benefit of hindsight, monetary policy needed to be still more aggressive,” he said.

Considered an inflation dove, Dudley has thrown his support behind QE3 and continued to argue in favor of the policy in his speech Monday.

He said he remains confident that the Fed will be able to keep inflation in check, despite unprecedented efforts to pump liquidity into the financial system. If inflation were to suddenly start rising rapidly, he said the Fed could tame it by raising the interest rate it pays banks on excess reserves.

Dudley also used the speech to reiterate a key point often expressed by Federal Reserve Chairman Ben Bernanke. “Monetary policy is not a panacea,” he said, urging Congress and the White House to do their part to stimulate the economy, both by addressing the long-term debt of the country and enacting policies to stimulate the economy now.

“Fiscal policy is now a drag rather than a support to growth in the U.S., and this will likely continue,” Dudley said.

He spoke in favor of immigration policies that attract foreign workers with scarce skills, education and job retraining programs, infrastructure spending and a simpler tax code.

Nearly 99,000 homeowners refinanced their mortgages in August through the Home Affordable Refinance Program (HARP), according to a new report released by the Federal Housing Finance Agency (FHFA) Tuesday.

The federal government’s HARP initiative, which is applicable for borrowers with loans owned by Fannie Mae or Freddie Mac, has put 618,217 homeowners into new mortgages with lower interest rates since the beginning of this year, when a broader group of borrowers were made eligible for the program.

According to FHFA, HARP is on target to reach a million borrowers in 2012. The agency attributes the continued

high volume of HARP refinances to record-low mortgage rates and program enhancements that included the elimination of its maximum loan-to-value (LTV) ratio limit.

Fannie Mae and Freddie Mac loans refinanced through HARP accounted for nearly one-quarter of all refinances in August, 24 percent to be exact. In states hard-hit by the housing downturn–-Nevada, Arizona, and Florida–-HARP refinances represented nearly half or more of total refis during the month.

HARP refinances for borrowers with LTV ratios greater than 105 percent accounted for more than 70 percent of HARP volume in Nevada, Arizona, and Florida and more than 60 percent of the HARP refinances in Idaho and California. Nationwide, LTV ratios above 105 percent characterized more than half of new HARP loans made in August.

FHFA also noted in its report that nearly 18 percent of HARP refinances for underwater borrowers were for shorter-term 15- and 20-year mortgages in August. By reducing their mortgage terms, these borrowers will be able to build equity faster.

Since the program’s inception in 2009, FHFA reports, Fannie Mae and Freddie Mac have financed more than 1.6 million loans through HARP.

Federal Reserve Bank of Richmond President Jeffrey Lacker admitted Friday that he dissented at all six of the Federal Open Market Committee meetings this year because he remains opposed to specific parts of the Fed’s quantitative easing policies.

Lacker’s most well-known objection is his vote against the Fed’s most recent decision to launch QE3, which is essentially another round of mortgage-backed securities acquisitions with an open-ended closing date.

While speaking at the University of Virginia Friday, Lacker said he supports keeping interest rates low, but believes MBS purchases by the Fed reduce borrowing rates for conforming home loans while lifting interest rates for other borrowers.

This type of formula can “distort credit flows,” he explained.

“I believe that the benefits of that action are likely to be small, because it’s unlikely to improve growth without also causing an unwelcome increase in inflation,” he explained. “At the same time, adding to our balance sheet increases the risks we’ll have to move quickly when the time comes to normalize monetary policy and begin raising rates.”

Lacker told the audience the U.S. lost 8 million jobs in the recession and has only added back a little over 4 million positions.

Still, the realities of today’s economic situation are quite clear, according to Lacker. Going forward, the nation’s economic stability will be largely dictated by tax and spend policies at the government level, he suggested.

Problem is, the so-called recovery is being completely administered (LOL) which does not change reality—only the perception of reality. Thus, the market (price discovery mechanism) is a total farce which is the purest example of why another crash is coming.

There has been no price discovery in the market. No true balance of supply and demand. The federal reserve bypassed price discovery and went from one bubble to another. At this point, I expect to see a rebound bubble in healthier markets while some beaten down markets continue to languish. Unfortunately, economic stimulus through lower mortgage rates cannot be targeted to the effected areas.

The Fed cant create another bubble unless the banks are willing to go along for the ride. Especially since they will be dealing with a more poor and overly debt burded public the next time. Its like the police dept making conditions as easy as possible for drug dealers in hopes the crack addicts will come back. When the addicts start OD’n again the police will turn a blind eye and resupply the dealers with more drugs for the next party.
The saddest part of this story are the countless crack babies that will have to grow up and become worse addicts than thier parents to keep this show going.

If mortgage rates move uncontrollably higher despite the Bernanke Bazooka, I will rethink my market prognostication. Affordability is very high right now, so interest rates have some room to move higher, but if they go up too much affordability will greatly limit the recovery and could easily reverse it.

In the second presidential debate, the candidates did everything they could to avoid talking about housing. In listing what he did over the last four years, Obama didn’t mention any housing accomplishments. And, in listing all the problems that Obama failed to fix, Romney didn’t mention housing, either. Both candidates even avoided the mortgage interest deduction when talking about taxes. Romney suggested capping aggregate deductions at $25,000 without explicitly limiting any particular deduction, and Obama criticized Romney for not specifically calling out which deductions he would limit.

But housing was a part of this debate, even if not by name. Nearly half of the value of itemized deductions is housing-related, and capping deductions at $25,000 would hit many middle-income people. To see what a cap on itemized deductions would mean for housing, we looked at the most recent published IRS data on individual tax returns (2009) to sort out the facts.

First, let’s start by looking at who actually itemizes their tax deductions. The table below shows that only one-third of tax-filers itemize, but this ranges hugely by income. Only 15% of filers with less than $50,000 adjusted gross income (AGI) itemize their deductions, compared with 96% with $200,000 or more AGI. Higher-income filers include a much higher average total of itemized deductions, too. A cap of $17,000 – which is what Romney suggested two weeks ago – is roughly equal to the amount that the typical itemizer with less than $50,000 AGI deducts, so many lower-income itemizers wouldn’t be affected at all by that cap. But even a higher cap of $25,000 would hit many people in the $50,000-$200,000 range and probably most in the $200,000-plus range.

Among all filers, nearly half – 49% — of the value of their itemized deductions is housing-related, which includes home mortgage interest, real estate taxes and a few other small deductions like deductable mortgage points and qualified mortgage insurance premiums. Housing-related deductions account for 56% of the middle-income filers’ deductions – more than the share for lower-income or higher-income filers.

If a bill to eliminate/reduce the MID ever gets into Congress [which I believe it will regardless of who’s elected –simply because the Feds are cash strapped], watch for the Real Estate Industrial Complex to throw a hissy fit unlike any in modern times.

Eliminating / Reducing the MID is very important for a number of reasons:

1) It will tend to force down housing prices. (Even if a small amount, every little bit helps!)

2) More importantly, it will set a precedent demonstrating the one way slide down the razor blade of out of control Government meddling can be reversed. I think this will embolden others to reduce/eliminate every other stupid government housing subsidy such as Fannie, Freddie, FHA, TARP, HARP, on and on.

And finally, at long last, whenever I go to an open house I won’t be pelted by the realtor reminding me “to think of all the tax advantages”.

This could have major implications for pricing in areas like Orange County where many people with huge mortgages itemize. Perspective said he gains about $1,700 per month from the HMID. Many other high wage earners get a similar tax break. If that goes away, or even if it’s cut in half, that will have a huge impact on affordability and house prices in mid- to high- end neighborhoods.

Look at the perverse incentives the HMID creates. Perspective is far better off with a 15-year mortgage despite losing most of the deduction. He is paying far less interest. However, most people will look at the tax deduction and reason that if they take out the largest mortgage possible and pay the most interest they have, they will get a big reward from the government. They don’t realize they are paying a dollar to save a quarter. The HMID blinds people to this reality.

The article didn’t mention state income taxes! If your household income exceeds six figures and you live in a high tax state like CA, your state income taxes make-up a decent chunk of your Itemized Deductions.

Also not mentioned, is how the AMT effectively takes-back most of your Itemized Deductions, but for mortgage interest. If you’re a higher-earner, you’re not benefiting fully from being able to deduct $40k in Itemized Deductions currently. Depending on how the AMT is reformed, who knows whether limiting Itemized Deductions to $25k would help or harm you?

[…] housing news has some naysayers urging caution, such as Irvine Renter Larry Roberts who, in this item at his O. C. Housing News blog wonders how strong the recovery really is and what could reverse it. […]

Federal officials have arrested a suspect that they say was plotting to attack the Federal Reserve’s building in New York City, according to a report from NBC 4 News.

Law-enforcement officials said that the plot was a sting operation monitored by the Federal Bureau of Investigation and the New York Police Department and that the public was never at risk, according to the report.

According to the report, the suspect drove a van he believed to be loaded with explosives from Long Island to Lower Manhattan.

He then placed the van near the Federal Reserve and was then arrested by the FBI and NYPD.

“It is important to emphasize that the public was never at risk in this case, because two of the defendant’s ‘accomplices’ were actually an FBI source and an FBI undercover agent,” said Mary Galligan, the N.Y. Fed’s acting assitant director. “The FBI continues to place the highest priority on preventing acts of terrorism.”

The suspect, whom sources said is from the Jamaica Queens section of New York City, is currently in custody in New York. Sources say he was acting alone

“As alleged in the complaint, the defendant came to this country intent on conducting a terrorist attack on U.S. soil and worked with single-minded determination to carry out his plan. The defendant thought he was striking a blow to the American economy. He thought he was directing confederates and fellow believers. At every turn, he was wrong, and his extensive efforts to strike at the heart of the nation’s financial system were foiled by effective law enforcement. We will use all of the tools at our disposal to stop any such attack before it can occur. We are committed to protecting the safety of all Americans, including the hundreds of thousands who work in New York’s financial district,” stated United States Attorney Lynch. “I would like to thank our partners at the FBI, NYPD, the other agencies who participate in the JTTF, and the Department of Justice’s National Security Division for their hard work on this important investigation. I would also like to thank the security teams at the New York Federal Reserve Bank and the New York Stock Exchange for their assistance.”

“As alleged in the criminal complaint, Rezwanul Nafis devised this attack plan himself and came to the United States for the purpose of carrying out such an attack. I thank all those responsible for ensuring that his alleged plans never came to fruition,” said Assistant Attorney General for National Security Monaco.

FBI Acting Assistant Director in Charge Galligan stated, “Attempting to destroy a landmark building and kill or maim untold numbers of innocent bystanders is about as serious as the imagination can conjure. The defendant faces appropriately severe consequences. It is important to emphasize that the public was never at risk in this case, because two of the defendant’s ‘accomplices’ were actually an FBI source and an FBI undercover agent. The FBI continues to place the highest priority on preventing acts of terrorism.”

Yes, he would have been just as well served to allow the Fed to self destruct, and he wouldn’t have had to spend the rest of his life in prison. Of course, in prison he no longer has to worry about those problems. He will be given food and shelter for the rest of his life.